CalPERS Throwing Away Money On Green Investments

A top official with Californiaâs public employee pension system admitted this week that its holdings in green energy companies have lost hundreds of millions of dollars.

Joseph Dear, the chief investment officer of the California Public Employeesâ Retirement System (CalPERS), called its green energy investments âa noble way to lose money.â

The admission came shortly after CalPERS officials voted to divest from high-performing investments in companies that manufacture firearms, fueling criticism that the organizationâs investment decisions are based on political factors, rather than a determination to maximize returns.

According to Dear, CalPERSâ $900 million green energy investment fund has produced an annualized return of <u>negative 9.7 percent</u>.

âWeâre all familiar with the J-curve in private equity,â Dear said at the Wall Street Journalâs ECO:nomics conference this week. âWell, for CalPERS, clean-tech investing has got an L-curve for âlose.ââ

âOur experience is this has been a noble way to lose money,â Dear said. But he added that CalPERS would dial back its green energy holdings given the extensive losses it has produced for Californiaâs public sector retirees.

If prices for renewable fuels do not decline, Dear said, âsomebody has to step in and either raise the price of carbon or lower the cost of the alternativesâ to make the industry financially viable.

âOne of the fundamental problems with governments holding large investment portfolios is the potential for those investments to be influenced by politics rather than sound finance strategy,â said Jason Richwine, a senior policy analyst at the Heritage Foundation.

The value of Ruger stock has increased more than five-fold since 2007, when CalPERS began investing in green energy companies. Smith & Wesson stock value has declined by about 16 percent in that time.

âInvestment strategies that pursue âsocial goalsâ at the expense of investor (or pensioner and taxpayer) interests are reprehensible,â said Jagadeesh Gokhale, a senior fellow at the Cato Institute.

Gokhale said the most troubling aspect of public pension accounting âconcerns insufficient attention to safety of principal, diversification, and especially proper asset-liability matching because state pension benefits are mostly constitutionally (or court) protected.â

Those protections can make public pension investment decisions act as de facto subsidies for politically favored industries, Richwine noted.

âAdministrators can risk money on ânobleâ investments, all the while knowing that their losses are covered by taxpayers,â Richwine said.

âIn that sense, using the pension fund to invest in green energy is a way to subsidize industries without having to go through the awkward process of actually passing legislation.â

CalPERSâ green energy-centric investment strategy was the product of its former chief executive, Russell Read, who âsuccessfully transitioned [CalPERS] toward clean technology and environmental investments,â according to a press release from a company he co-founded after leaving CalPERS.

Read, who now works for an investment firm in Kuwait, could not be reached for comment. CalPERS did not respond to a request for comment.

In March 2011, for example, the GAO examined the first 18 loans that were approved and found that none were properly documented. It also noted that officials âdid not always record the results of analysisâ of these applications. A loan program for electric cars, for example, âlacks performance measures.â No notes were kept during the review process, so it is difficult to determine how loan decisions were made. The GAO further declared that the Department of Energy âhad treated applicants inconsistently in the application review process, favoring some applicants and disadvantaging others.â The Department of Energyâs inspector general, Gregory Friedman, who was not a political appointee, chastised the alternative-energy loan and grant programs for their absence of âsufficient transparency and accountability.â He has testified that contracts have been steered to âfriends and family.â